Owen v. Owen/Dissent Stevens

Justice STEVENS, dissenting.

The Court's analysis puts the cart before the horse. As I read the statute at issue, it is not necessary to reach the issue the majority addresses. In construing the lien avoidance provisions of the Bankruptcy Code, it is important to recognize a distinction between two classes of cases: those in which the lien attached to the exempt property before the debtor had any right to claim an exemption, and those in which the lien attached after the debtor acquired that right. This case falls in the former category. As I shall explain, I believe it was correctly decided by the Bankruptcy Court, the District Court and the Court of Appeals, and that the judgment should be affirmed.

* The facts raise a straight forward issue: whether the lien avoidance provisions in § 522(f) of the Bankruptcy Code, 11 U.S.C. § 522(f) ^[1] apply to a judicial lien that attached before the debtor had any claim to an exemption. It is undisputed that respondent's judicial lien attached to petitioner's Sarasota condominium when he acquired title to the property in November 1984. It is also undisputed that the petitioner was not entitled to a homestead exemption when he acquired title because he was single. At that time, the exemption was available only to a "head of a household" under Article 10, § 4 of the Florida Constitution. An amendment that became effective in 1985 broadened the exemption to extend to "a natural person." Fla. Const., Art. 10, § 4. On the effective date of this amendment petitioner became entitled to the homestead exemption at issue in this case. ^[2] Thus, it is undisputed that the petitioner had an exemption on his condominium when he filed his bankruptcy petition in 1986, but did not have a right to that exemption in 1984 when respondent's judicial lien attached.

As I read the text of § 522(f), it does not authorize the avoidance of liens that were perfected at a time when the debtor could not claim an exemption in the secured property. The Bankruptcy Code deals with the subject of exemptions in two separate provisions that are relevant to this case. The first of these provisions, § 522(b), identifies property that is exempt from the claims of general creditors. ^[3] Focusing on the legal interests in the property at the time of the bankruptcy, this section identifies property that is exempt from the bankrupt estate, and therefore cannot be sold by the trustee to satisfy the claims of general creditors. See H.R.Rep. No. 95-595, pp. 360-361 (1977); S.Rep. No. 95-989, pp. 75-76 (1978), U.S.Code Cong. & Admin.News 1978, p. 5787. In this case, petitioner's condominium in Sarasota, Florida was entitled to a homestead exemption as a matter of Florida law when he filed for bankruptcy and therefore was properly excluded from the estate. See 877 F.2d 44, 45 (CA11 1989). The property was fully protected from the claims of general creditors by the operation of § 522(b).

The second provision that is relevant to this suit, § 522(f), is concerned with the priority of secured creditors not the claims of general creditors. Section 522(f) establishes a rule of priority between the debtor's legal interest and creditors' security interests in exempt property as opposed to the property of the estate. The statute establishes the priority by allowing the debtor to avoid the fixing of judicial liens and certain nonpossessory, nonpurchase-money security interests under the right circumstances to the extent that they encumber the exemption.

As it applies to judicial liens, § 522(f) raises two questions: (1) whether the exemption provides a basis for avoidance of the lien; and (2) if so, to what extent should the lien be avoided? The first question concerns the relative priority of conflicting claims on the same asset; on such issues, the timing of the claims is often decisive. The second question-I shall call it the "impairment question"-concerns the distribution of the proceeds of sale after the issue of priority has been resolved. This second question need not be reached unless the first question has been answered positively.

In determining whether the exemption provides a basis for avoiding the lien, § 522(f) turns our attention towards the exemption to which the debtor would have been entitled at the time the lien "fixed." In United States v. Security Industrial Bank, 459 U.S. 70, 103 S.Ct. 407, 74 L.Ed.2d 235 (1982), this Court was presented with the question whether applying § 522(f)(2) to avoid nonpossessory liens perfected before the enactment of the Bankruptcy Reform Act of 1978 would be a taking of property without compensation in violation of the Fifth Amendment of the Constitution. The Court avoided deciding that precise question by holding that § 522(f) did not apply retroactively to liens that had been perfected before the Bankruptcy Reform Act was enacted. Although there is no such constitutional question presented here, Security Industrial Bank, establishes that the critical date for determining whether a lien may be avoided under the statute is the date of the fixing of that lien.

The date of the fixing of the respondent's lien on petitioner's condominium is therefore controlling in this case. Because it is undisputed that petitioner was not entitled to an exemption when the lien attached, the subsequently acquired exemption does not provide a basis for avoidance of the respondent's lien. ^[4] Thus, the priority question in this case was correctly decided by the Court of Appeals and its judgment should be affirmed.

The Court frames the question it decides as whether the lien avoidance provisions in § 522(f) "can operate when the State has defined the exempt property in such a way as specifically to exclude property encumbered by judicial liens." Ante, at 306. That is an accurate description of the issue that has arisen in cases concerning the avoidability of nonpossessory, nonpurchase-money liens on household goods. See cases cited, ante, at 310, nn. 1 and 2. ^[5] In each of those cases the state's definition of the exemption purported to exclude property interests that were subject to otherwise avoidable liens under § 522(f). Thus, the state's definition of the exemption itself defeated the purpose of the federal lien avoidance provisions by narrowing the category of exempt property. ^[6]

The majority and dissenting opinions in In re McManus, 681 F.2d 353 (CA5 1982), adequately identify the issue to which the Court's opinion today is addressed. In that case a finance company (AVCO) held a promissory note secured by a nonpossessory, nonpurchase-money security interest in the form of a chattel mortgage on some of the debtor's household goods and furnishings. The debtors sought to avoid AVCO's lien under § 522(f) on the ground that their household goods and furniture were exempted under § 522(b). The Bankruptcy Court and the District Court refused to avoid the lien. The Court of Appeals, following the reasoning of the Bankruptcy Court, affirmed. ^[7] Louisiana had established a homestead exemption for certain household goods and furniture. Yet, it had also explicitly established in a separate code provision that notwithstanding its definitions of homestead exemptions, any household goods or furniture encumbered by a mortgage are not exempt property. The majority of the Court of Appeals held that the liens were not avoidable because the State of Louisiana had utilized its authority under § 522(b) to define its exemptions to exclude household goods subject to mortgages; hence the liens did not impair an exemption to which the debtors would have been entitled under § 522(b).

Under my reading of § 522(f), the Court of Appeals erred because it focused its attention entirely on the situation at the time of the bankruptcy. If it had analyzed the case by noting that at the time AVCO's lien attached, the debtors were already entitled to an exemption, it should have concluded that the lien was avoidable. The dissenting judge came to that conclusion by correctly recognizing that the statutory text evidences an intent to consider the situation at the time of attachment. He wrote:

"The opening phrase of § 522(f), '[n]otwithstanding any waiver of exemptions,' indicates that the subsection's import is to return the situation to the status quo ante, i.e., prior to any improvident waiver of any exemption by the debtor. When the debtors entered the creditors' office they enjoyed an exemption under Louisiana law from seizure and sale of their household goods; and when they left the office they could no longer claim an exemption for those goods solely because they had improvidently granted a security interest to the creditors covering such goods. I fail to see how this could be characterized as anything but a waiver of exemptions, subject to the avoiding power found in § 522(f)." Id., at 358. ^[8]

Although the Court's opinion today resolves the question that was presented in McManus by adopting the position of the dissent in McManus, I disagree with the Court's reasoning. The Court simply overlooks the fact that for purposes of determining whether a lien is avoidable-rather than for the purpose of determining the extent to which the lien should be avoided-the question whether the debtor "would have been entitled" to an exemption is addressed to the state of affairs that existed at the time the lien attached.

Finally, I must comment on the Court's conclusion "that Florida's exclusion of certain liens from the scope of its homestead protection does not achieve a similar exclusion from the Bankruptcy Code's lien avoidance provision." Ante, at 313-314. This statement treats Florida's refusal to apply its broadened homestead exemption retroactively as the equivalent of Louisiana's narrowing definition of its household goods exemption to exclude properties subject to a chattel mortgage. The conclusion is flawed. Petitioner would not have been entitled to a homestead exemption at the time respondent's judicial lien attached; for that reason the lien avoidance provisions in § 522(f) of the Bankruptcy Code are not applicable. I would therefore affirm the judgment of the Court of Appeals.

Notes

1. Section 522(f) provides:
2. The amendment was adopted in November 1984, but became effective on January 8, 1985. See Fla. Const., Art. 11, § 5.
3. Section 522(b) provides, in relevant part:
4. I recognize that in reading the text of § 522(f), it is possible to find ambiguity in the timing issue from the placement of the phrase "under subsection (b) of this section." As I understand the interaction between § 522(b) and § 522(f), however, those words merely define the exempt property for the purposes of determining the priorities between the debtor and secured creditors-namely the kinds of exemptions that may justify an avoidance. The fact that § 522(b) itself refers to the status of the lien at the time of bankruptcy for the purpose of identifying the property as exempt from the claims of general creditors is simply irrelevant to the priority question posed under § 522(f). The Court's statement, ante, at ---- - ----, n. 6, that "[w]e follow the language of the Code" ignores this point, ignores our holding in United States v. Security Industrial Bank, 459 U.S. 70, 103 S.Ct. 407, 74 L.Ed.2d 235 (1982), and ignores our holding in Farrey v. Sanderfoot, --- U.S. ----, 111 S.Ct. 1825, --- L.Ed.2d ---- (1991).
5. Two of these cases, however, do address different issues. In re Brown, 734 F.2d 119 (CA2 1984) involved a judicial lien. In that case the issue was whether the debtor could avoid a judicial lien on his homestead after a foreclosure sale where New York law did not allow an exemption on the proceeds of a foreclosure sale. In re Thompson, 750 F.2d 628 (CA8 1984) was concerned with the issue of whether a debtor could avoid a lien on a Nebraska exemption on livestock under § 522(f)(2).
6. In this case, in contrast, Florida's definition of its household exemption excluded petitioner's property because it was not used as a family residence at the time his former spouse's lien attached. The subsequent broadening of Florida's homestead exemption was not even arguably intended to protect the interest of lien holders or to defeat the purposes of the federal lien avoidance provisions.
7. Another case with similar facts, Blazer Financial Services v. Gipson was consolidated with In re McManus before the Court of Appeals. In re McManus, 681 F.2d 353 (CA5 1982). The debtors were a married couple who had filed a petition in bankruptcy and sought to avoid a finance company's nonpossessory, nonpurchase-money security interest in their household goods. See id., at 355.
8. Judge Dyer buttressed his conclusion by reference to the legislative history:

"This is clearly indicated in S.Rep. No. 95-989, 95th Cong., 2d Sess. 76, U.S.Code Cong. & Admin.News 1978, pp. 5787, 5862:

" '[To] protect the debtors' exemptions, his discharge, and thus his fresh start, . . . [t]he debtor may avoid . . . to the extent that the property could have been exempted in the absence of the lien . . . a nonpossessory, nonpurchase-money security interest in certain household and personal goods.'

"Thus it was Congress's clear intent that a debtor benefit to the fullest extent possible exemptions granted to him by applicable state laws, even when he may have improvidently waived such exemptions. It is equally clear that Congress was particularly concerned with eradicating certain unconscionable creditor practices in the consumer loan industry." In re McManus, 681 F.2d, at 358.